CEILI’S CALGARY (ROYAL OAK) LTD. OF THE CITY OF CALGARY IN THE PROVINCE OF ALBERTA
TRUSTEE’S FIRST REPORT TO THE CREDITORS GRANT THORNTON LIMITED
All Capitalized terms are defined under Part I of the Proposal. A. TERMS OF REFERENCE
1. In developing this report (the “Trustee’s First Report”), Grant Thornton Limited (the “Trustee”) has relied upon unaudited financial information prepared by Ceili’s Calgary (Royal Oak) Ltd.’s (“Ceili’s Royal Oak” or the “Company”) management (“Management”), the Company’s books and records and discussions with Management. The Trustee has not performed an audit or other verification of such information. An examination of the Company’s financial forecasts as outlined in the Canadian Institute of Chartered Accountants Handbook has not been performed. Future oriented financial information relied upon in the Trustee’s First Report is based on Management’s assumptions regarding future events; actual results achieved may vary from this information and these variations may be material. The Trustee expresses no opinion or other form of assurance with respect to the accuracy of the financial information presented in the Trustee’s First Report, or relied upon by the Trustee in preparing the Trustee’s First Report.
B. BACKGROUND AND CAUSES OF FINANCIAL DIFFICULTIES
2. Ceili’s Royal Oak was incorporated in February 2011 pursuant to the Business Corporations Act of Alberta and has operates as a restaurant/pub in northwest Calgary since November 2013. Ceili’s Royal Oak is a private company owned by several individual shareholders. The two largest
shareholders are Prairie Merchant Corporation (“PMC”) and W.M.J. Consulting Corp. (“W.M.J.”), which is wholly owned by the sole director of Ceili’s on 7th Ltd., W. Michael Joseph.
3. There are several other related companies, most of which (the “Restaurants”) operate
restaurant/pubs under similar names and are owned by a similar group of shareholders. These are listed as follows:
The Ceili’s Group
a) The Ceili’s Group Inc. (“Head Office”) handles administrative functions for the Restaurants in return for a monthly management fee from each of the Restaurants in the Ceili’s Group (defined below). The current monthly management fee paid by Ceili’s Royal Oak is $10,000; b) Ceili’s On 4th Ltd. (“C4”) operates a Restaurant located in downtown Calgary; and
c) Ceili’s On 7th Ltd. (“C7”) operates a Restaurant located in downtown Calgary.
Ceili’s Royal Oak, Head Office, C4, and C7 continue to be operated by existing Management and have filed concurrent Notices of Intention pursuant to the Bankruptcy and Insolvency Act with the Trustee. They are collectively referred to as the (“Ceili’s Group”).
The Closed Restaurants
d) Ceili’s (South Calgary) Ltd. operated a location in Calgary which closed in August 2014; e) Ceili’s Irish Pub (Vancouver) Ltd. operated a location in the Vancouver area which closed in
May 2014; and
f) Ceili’s Irish Pub (South Surrey) Ltd. operated a location in the Vancouver area which closed in July 2014.
The BC Restaurants
g) Ceili’s Irish Pub (Westside) Ltd. operates a location in the Vancouver area; and h) Ceili’s Irish Pub (Richmond) Ltd. operates a location in the Vancouver area.
The BC Restaurants are no longer considered part of the Ceili’s Group as they are under separate management, as Michael Joseph has resigned as director and Ceili’s Head Office no longer provides any services to the BC Restaurants as of July 31, 2014. The BC Restaurants have each filed a Notice of Intention with a trustee in the Vancouver area.
4. Historical operating results for Ceili’s Royal Oak show that it incurred net losses of approximately $61,000 in the ten months from the time it opened to the NOI Date. The Company had expected to incur some losses in its early months and had raised sufficient capital to absorb those losses. However, during this time several of the other Restaurants listed above generated net losses over the same period and did not have sufficient cash to continue to operate. In order to assist these
Restaurants while they attempted to attain profitability, Ceili’s Royal Oak, through its Head Office Management, provided intercompany loans from time to time to several of the Restaurants, with the following notable amounts owing to Ceili’s Royal Oak on August 22, 2014:
a) The Closed Restaurants borrowed a total of approximately $382,000, comprised as follows: i) Ceili’s (South Calgary) Ltd.: $124,000;
ii) Ceili’s Irish Pub (Vancouver) Ltd.: $116,000; and iii) Ceili’s Irish Pub (South Surrey) Ltd. $142,000.
b) The BC Restaurants borrowed a total of approximately $78,000, comprised as follows: i) Ceili’s Irish Pub (Westside) Ltd.: $78,000; and
ii) Ceili’s Irish Pub (Richmond) Ltd. - nil.
5. In addition C4 and C7 borrowed $42,000 and $33,000 respectively in order to cover cash shortfalls caused by their own loans to the unprofitable restaurants. In total, Ceili’s Royal Oak loaned $535,000 to other Restaurants.
6. Management attempted to stem the flow of funds out of Ceili’s Royal Oak by closing the Closed Restaurants and separating from the BC Restaurants. However, with a cash shortage resulting from slower business over the summer months, Ceili’s Royal Oak became unable to service its debts as they became due. By August 2014, Ceili’s Royal Oak was unable to pay rent for the lease of its premises and lacked funds to meet payroll.
7. Our review indicates that the causes of Ceili’s Royal Oak’s insolvency are as follows: a) Strategy of lending available cash to related unprofitable companies;
b) Delaying the decision to close unprofitable locations; c) Inadequate cash planning; and
d) Inability to obtain further equity injections to cover its immediate cash shortage.
8. On August 22, 2014 (the “NOI Date”), Grant Thornton Limited consented to act as Trustee for the Notice of Intention to Make a Proposal (“NOI”) for Ceili’s Royal Oak. On August 29, 2014,
the Trustee filed the required report on the Company’s projected statement of cash flow for the period ended January 26, 2015.
9. On September 4, 2014 the Court granted an order authorizing Ceili’s Royal Oak to borrow funds from PMC by way of an interim financing (“DIP”) facility. This Order granted PMC a priority charge over all of the assets of Ceili’s Royal Oak for amounts advanced pursuant to the Order. Ceili’s Royal Oak borrowed $25,000 in total (excluding fees and expenses) from PMC pursuant to the DIP facility.
10. On September 19, 2014, Ceili’s Royal Oak received an extension of the time to file a proposal to November 3, 2014 pursuant to a Court Order. On November 3rd, 2014 the Company filed the Proposal.
11. The Trustee’s First Report is intended to provide the Creditors and other interested parties with information in connection with the Company’s Proposal.
C. THE PROPOSAL Overview
12. In order to re-organize the Company and allow it to continue as a going concern, maximize the distribution available to creditors, and preserve corporate value, Management believes that the Company’s best alternative is to put forth a restructuring plan that includes the following:
a) Payment in full to all Crown Creditors and Preferred Creditors, if any;
b) Cash payments to Ordinary Unsecured Creditors over an 11-month period to commence May 31, 2015. Ordinary Unsecured creditors will receive a share of a $135,000 Unsecured Creditors’ Fund (the “Fund”) which will be funded from the Company’s net operating cash flow over the period;
c) Unsecured Noteholder Creditors, who hold promissory notes for funds provided to the Company in relation to shareholdings in the Company, will have their promissory notes amended such that they will mature in February 2022, which is approximately one year earlier than previously provided for;
d) Secured Creditors will be treated as Unaffected Secured Creditors and will continue to do business with the Company in the normal course;
e) No other companies in the Ceili’s Group will submit a Claim in the Proposal according to the Proposal terms; and
f) All payments to Crown Creditors, Preferred Creditors, and Ordinary Unsecured Creditors shall be without interest or penalty and subject to deduction of the Levy payable to the Superintendent of Bankruptcy, based on payments pursuant to this Proposal.
13. The Company’s operating cash flows will fund the Proposal payments, with the amount and timing of payments having been calculated based on the Company’s operating projections for the period. 71% of forecast net operating cash flow, after re-payment of the DIP loan, will fund creditor payments under the Proposal. In an effort to stabilize the Company going forward, 29% of net operating cash flow will be retained as working capital to cover non-routine expenditures, provide a cushion for periods when sales are slower such as the summer months, and allow for a margin of error in the projections;
14. The ability of the Company to meet the terms of the Proposal is highly dependent on its ability to achieve the forecasted operating results. The Trustee has therefore taken steps to review the forecasts prepared by the Company which include but are not limited to the following:
a) Comparison of projected sale and operating expense values to the prior year’s actual results; b) Comparison of specific expenses to existing contractual agreements;
c) Sensitivity analysis; and
d) Inquiries and discussions with Company Management.
15. As a result of its review of the cash flow forecasts, the Trustee has noted the following:
a) Management states that the sales forecasts are based on historical results, recent sales trends, a review of the number of strong sales days in each calendar month, and momentum from recent marketing efforts;
b) The resulting monthly forecasted sales values are consistent with the prior 10 months actual results. However, since the NOI Date, the Company’s sales have been 20% less than it had forecasted. Management has attributed this to the instability caused by the Company’s insolvency, staffing issues at the restaurant, and the fact that the sales it had forecasted for the period were optimistic. In the projections the Company prepared for the Proposal period, sales forecasts have been reduced;
c) The ability of the Company to achieve its sales forecasts is critical, as the Trustee has analyzed the sensitivity of the forecasts and notes that, all else equal, if sales revenues are consistently 9% or more below the projections the Company will not be able to generate sufficient cash flow to fund the Proposal payments;
d) Food and liquor costs are estimated at 30% of sales. This is a decrease from 32% of sales from historical results. Since the NOI Date, food/liquor expenses on a cash basis have been even higher, at 39% of sales, however Management states that this is temporary, partially due to replenishment of inventory levels at the NOI Date, higher than usual discounts given in recent weeks, and staffing issues which have now been addressed;
e) The ability of the Company to manage its costs is also critical, as the Company’s forecasts are highly sensitive to an increase in costs. For example, if food/liquor expenses remain
consistently above 33% of sales the Company will not be able to generate sufficient net cash flow to fund the Proposal payments;
f) Bank loan payments are based on increased payment terms resulting from a recently executed forbearance agreement between the Company and the Alberta Treasury Branch (“ATB”); and g) Rent is based on the current lease agreement which expires in October 2023;
h) Management fees are paid to Head Office for corporate functions such as marketing, accounting, and purchasing. In addition, a 1% fee for the licensing of the Ceili’s name is being paid to its largest shareholder, W.M.J. pursuant to an agreement between W.M.J. and Ceili’s Royal Oak; and
i) Bank loan and DIP facility re-payments are included pursuant to the terms of the relevant agreements.
16. Based on the amount of known claims of Ordinary Unsecured Creditors, detailed in the Statement of Affairs provided with the Proposal, it appears that the Proposal terms will result in payment of approximately 42% of the principal balance of Ordinary Unsecured Creditors’ claims. However, if proven Ordinary Unsecured Claims are higher than listed on the Statement of Affairs, the amount each Ordinary Unsecured Creditor receives will be lower than currently estimated.
D. CREDITORS’ CLAIMS
17. Pursuant to the BIA, creditors are not required to submit proofs of claim until after the filing of the Proposal and therefore the claims of creditors have not been received or vetted by the Trustee at this time. As a result, the listing of creditors is an estimate and can vary materially from proven Claims. A list of the known creditors of the Company was provided after the filing of the NOI. Since that time, the amounts owing to creditors has been updated and the total claims are now approximately $1.6 million, which is approximately $300,000 higher than the amounts disclosed at the NOI Date. Material changes are discussed below:
a) A Secured Claim for $28,125 owing to PMC was added in relation to the DIP financing; b) The amount owing to ATB increased by $27,000 as a result of the Company’s cash being
reconciled;
c) The amount owing to Mike Joseph was increased by $165,630 as a result of a reconciliation of the accounting records;
d) The amount owing to John Reid was reduced by $50,000 as a result of reconciliation to the Company’s accounting records;
e) The amounts owing to the following related companies has been updated as a result of an intercompany reconciliation and review of validity of amounts in the accounting system:
a. Head Office was added at $75,000; and
b. The amount owing to C4 of $19,000 was removed.
f) $22,000 owing to the Receiver General has been added as it was omitted in error at the NOI Date;
g) The amount owing to GFS Prairies Inc. increased by $18,000 to reflect additional invoices that had not been processed at the NOI Date; and
h) Lessors have been added to the Secured Creditor listing. Secured Creditors
18. Pursuant to the Proposal Unaffected Secured Creditors’ claims will not be affected by the Proposal. The Company will continue dealing with the Unaffected Secured Creditors in
accordance with arrangements agreed upon between the Unaffected Secured Creditors and the Company. A summary of Unaffected Secured Creditors is as follows:
a) As mentioned above, Ceili’s Royal Oak borrowed $31,500, including fees and expenses, in DIP financing from PMC pursuant to a Court order dated September 4, 2014, with the funds to be fully repaid in four installments from December 2014 to March 2015. The DIP loan has priority over all other claims, including Secured Claims, according to the Court order. As a result, no payments to Unsecured Creditors pursuant to the Proposal will be made until the DIP loan has been repaid;
b) ATB is owed $312,107 and has registered security over all of the assets of Ceili’s Royal Oak in the Alberta Personal Property Registry (“PPR”). Since the NOI Date, Ceili’s Royal Oak has entered into a forbearance agreement with ATB which provides for increased monthly payments. In addition, it stipulates full re-payment of the loan will occur by October 31, 2015 subject to further review prior to that date;
c) The remaining Unaffected Secured Creditors, listed below, are equipment lessors who have registered their security in the PPR. They will continue to receive lease payments in the normal course according to lease agreements with the Company:
Name Security
Varion Capital Corp. Specified electronic equipment, and all present and after-acquired property of the debtor
Equirex Leasing Corp. Specified kitchen equipment and electronic equipment, and all present and after-acquired property of the debtor
CLE Leasing Enterprise Ltd.
Specified electronic equipment
Bodkin Capital Corp. Collateral encompassed in lease agreement D&D Leasing Specified building equipment
19. The claims of Secured Creditors have not been the subject of an independent security review. Unsecured Creditors
20. Pursuant to the Statement of Affairs, approximately $1.25 million is owed to unsecured creditors. This is summarized as follows:
Crown Claims
21. Crown Claims, as defined in the Proposal, which are proven, will be paid in full without interest or penalty within 6 months of the Effective Date. At this time there are no known Crown Claims. Preferred Creditors
22. Preferred Claims, as defined in the Proposal, which are proven, will be paid in full within 6 months of the Effective Date. Approximately $37,500 is owed to Certus Developments Inc, landlord for Ceili’s Royal Oak.
Unsecured Noteholder Creditors
23. The Unsecured Noteholder Creditors are also shareholders of Ceili’s Royal Oak who have contributed funds to the Company by way of a shareholder loan supported by promissory notes which are due and payable in 2023. The known claims of the Unaffected Unsecured Creditors total $820,715, as listed in Exhibit B to the Proposal.
24. As mentioned above, the Proposal terms state that the promissory notes held by the Unsecured Noteholder Creditors will be amended to advance the maturity date to February 2022.
Ceili’s Group Creditors
25. The total owed to Ceili’s Group companies is $75,000. As mentioned above, the Proposal terms state that these companies will not file a Claim in the Proposal.
Unsecured Creditors
26. The remaining $319,000 is owed to Ordinary Unsecured Creditors (not including Ceili’s Group Creditors). Pursuant to the Proposal, proven Ordinary Unsecured Creditors will receive a pro-rata share of payments from the $135,000 Ordinary Unsecured Creditors’ Fund.
a) May 31, 2015; b) August 31, 2015;
c) November 30, 2015; and d) March 31, 2016.
28. Based on the known Ordinary Unsecured Creditors, the total payments to Ordinary Unsecured Creditors will amount to approximately 42% of the principal balance of Ordinary Unsecured Claims.
E. BENEFITS OF THE PROPOSAL
29. The benefits of the Proposal include the following:
a) Ordinary Unsecured Creditors receive payments of their Claim over a period of 11 months. Based on known Claims, Ordinary Unsecured Creditors will receive approximately 42% of the principal balance of their Claims. The funds to pay the claims under the Proposal will come from the forecasted net cash flows from the Company’s operations. As discussed above, the Company’s ability to achieve its forecasted results is critical to its ability to fund the Proposal Payments. If the Company were to become bankrupt, it is highly unlikely that Ordinary Unsecured Creditors would receive any distribution;
b) Unsecured Noteholder Creditors will maintain their rights to repayment of the amounts advanced to the Company in the future, with the related promissory notes becoming due approximately one year earlier than previously provided for; and
c) The Company will continue to operate, enabling it to retain staff, continue its ongoing relationship with its suppliers, and maintain value for its shareholders.
F. CURRENT FINANCIAL POSITION
30. In reviewing the financial position of Ceili’s Royal Oak, the Trustee has necessarily relied on financial information and representations by Management. While the majority of the financial information provided by the Company has not been audited, the records appear to be in good order and Management has been diligent and responsive in providing all information requested. Based on this review, the Trustee is of the view that Ceili’s Royal Oak’s current financial position can be summarized as follows:
Ceili's Calgary (Royal Oak) Ltd.
Financial Position
(Unaudited)
Book Value Statement of Affairs
Estimated Net Realizable Value in
Bankruptcy
as at August 22, 2014
as at August 22, 2014 as at October 31, 2014
Assets
Cash $ 79,686 $ 3,113 $ 21,424 Accounts receivable inc.
intercompany 445,972 - - Other current assets 83,843 - 3,000 Machinery and equipment 950,926 187,000 -
Total Assets 1,560,427 190,113 24,424
Liabilities
Secured creditors 284,663 340,238 340,238 Shareholder loans 956,183 820,715 820,715 Account Payable and accrued
liabilities 403,180 432,006 432,006
Total Liabilities 1,644,025 1,592,959 1,592,959
Equity/(Deficiency) $ (83,598) $ (1,402,847) $ (1,568,535)
31. The Trustee has reviewed the book value pursuant to the Company’s balance sheet at August 22, 2014 compared to the Statement of Affairs values. Comments on material differences are as follows:
a) According to bank statements, cash in the Company’s bank account was $3,113 at the NOI Date. The Company states that its cash accounts had not been reconciled on the balance sheet as of August 22, 2014;
b) The Company’s assets include several intercompany loans. There has been no realization value ascribed to these loans for the following reasons:
i) The Closed Restaurants owe Ceili’s Royal Oak a total of $382,000. According to Management, there are no remaining assets to be realized upon and
therefore there will be no distribution to creditors; and
ii) The BC Restaurants owe Ceili’s Royal Oak a total of $78,000. Each of the BC Restaurants has filed a Notice of Intention and have applied for and received two extensions of the time to file a proposal. The Company intends to file a claim in those proceedings. However, the distribution, if any, to Ceili’s Royal Oak is not known at this time and Management states that, based on
discussions with the owner of the BC Restaurants, a significant distribution to creditors is not expected; and
iii) Due to the uncertainty of the amounts owing to each company as a result of comingling of funds and the co-depended nature of the proposals, the terms of each of those proposals state that the other Ceili’s Group companies will not be submitting a proof of claim in any of the proposals. Therefore, there will be no realization from the $75,000 owed by Ceili’s Group companies.
c) The other current assets are made up of mainly deposits and prepaid amounts which likely have no realizable value according to the Company;
d) In preparing the Statement of Affairs, Management states that it arrived at the value for the Company’s machinery and equipment by considering the value of the business if sold as a going concern, based on informal offers received for the Company prior to the NOI Date. The Trustee has not commissioned a formal business valuation regarding the Company; and e) The Secured Creditors on the Statement of Affairs includes the DIP financing obtained after
the NOI Date.
32. In a bankruptcy scenario, the Company has estimated that realizations would likely be in the range of $3,000 to $6,000 for the following reasons:
a) The Company would not continue to operate in a bankruptcy and therefore a sale as a going concern, preserving goodwill, would be unlikely as key staff and customers cannot be retained;
c) The forced sale value of restaurant equipment is generally quite low in comparison to the cost of the equipment. In addition, Management reports that all of the Company’s equipment is leased and any equity in the equipment is likely to be minimal;
d) Food and liquor inventory is likely to be minimal and would have very little value; and e) The Ceili’s naming rights are owned by Ceili’s Royal Oak’s largest shareholder, W.M.J.. 33. The Trustee has reviewed the Company’s estimates of realization in bankruptcy and notes that it
may be optimistic as it assumes that certain furniture and fixtures will have values that outweigh the lease payout on these items. Given the limited market for used restaurant furnishings, this may not be realistic. However, a formal appraisal of the assets has not been obtained.
34. The Trustee has not obtained an independent review of the security of the Secured Creditors, however, the Trustee has no reason to believe the security is not valid and enforceable. As shown in the above table, the amount realized from a liquidation of the assets would likely be insufficient to re-pay secured creditors after considering the costs of selling the assets and re-payment of the DIP facility. In addition, Preferred Claims including fees and disbursements of the Trustee would rank in priority to Unsecured Claims.
35. On the basis of the above, if a bankruptcy were to occur, it is highly unlikely that the net proceeds from the liquidation of the assets would result in full re-payment of Secured Claims and therefore it is very doubtful that there would be any distribution to Unsecured Creditors.
G. CONDUCT OF DEBTOR
36. The Trustee has completed a preliminary review of the banking activities in the 90 days preceding the date of the Company’s filing of a Notice of Intention. As a result of this preliminary review, the Trustee did not identify any unusual payments to vendors or other parties with the exception of the following:
a) As mentioned above, the Company had a practice of lending cash to unprofitable
Restaurants. During this period, several loans totaling approximately $47,000 were made to related companies. However, during this period the Company also borrowed approximately $45,000 from other related companies.
37. The Trustee has monitored the Company’s activities since the NOI Date and has identified the following areas for comment:
a) Since the NOI Date, the Company has incurred $7,000 in net operating losses since the NOI Date, with sales consistently below forecast and food/liquor costs consistently above forecast. As a result, the Company has not been able to consistently meet its on-going obligations payments to suppliers, secured creditors, and employees despite the assistance of the DIP financing it received; therefore, it has borrowed funds from C4 on a number of occasions. Initially, Ceili’s Royal Oak was able to re-pay these loans within a day or two as the
requirement for cash arose from the fact that sales revenues were not deposited in the Company’s account yet. However, in the two weeks prior to the date of this report the Company has fallen behind on its repayments of the loans from C4 as it was forced to choose between paying its suppliers and re-paying C4;
b) As of the date of this report, Ceili’s Royal Oak owes C4 $44,600. The Trustee is of the opinion that this constitutes a Material Adverse Change. Management states that Ceili’s Royal Oak will re-pay at least a portion of the amount owing within the next week or two, but has not been able to determine when it will be fully re-paid. In addition, Management states that it expects that Ceili’s Royal Oak will require additional short-term loans from C4 in the coming weeks, although it expects that those will be promptly repaid within one or two days. The DIP lender has been made aware of the situation regarding the intercompany loans and has indicated that it does not intend to take any action with respect to the DIP loan at this time. However, the Trustee notes that this situation likely constitutes a breach of the DIP loan terms;
c) Certain payments have been made on pre-NOI amounts after the NOI Dates as discussed below:
i) Despite the Company’s protests, a supplier for the Company has applied certain post-NOI credits totaling approximately $12,000 against pre-NOI debts. The Trustee has confirmed with the creditor that this practice will not be continued and the Company has requested that the amount be credited against future invoices.
38. In the Trustee’s view, Management for the Company has been working diligently and with good faith to formulate the Proposal and provide all relevant information to the Trustee.
H. REMUNERATION OF TRUSTEE
39. The Trustee's fees will be based on the time spent by the Trustee and the various members of its staff at their respective standard billing rates plus any direct out-of-pocket expenses incurred. All
administrative fees and expenses of the Trustee will be taxed by the Court. The Trustee will be entitled to take regular interim fees as approved by either the Court or Inspectors elected by the Unsecured Creditors.
I. ESTIMATED REALIZATIONS IN A LIQUIDATION SCENARIO
40. Based on information provided by the Company and the review by the Trustee, discussed above, it is highly unlikely that a bankruptcy liquidation of the Company’s assets would result in any
distribution to Unsecured Creditors, particularly after Trustee’s fees and liquidation costs.
J. PROCEDURE FOR VOTING ON THE PROPOSAL
41. The primary purpose of the Creditor’s Meeting, to be held on November 19, 2014 is to permit creditors to consider the acceptance or rejection of the Proposal. For the Proposal to be accepted, the Bankruptcy and Insolvency Act (“BIA”) requires that each of the classes of Affected Creditors, the Ordinary Unsecured Creditors and the Unsecured Noteholder Creditors, vote in favour of the Proposal at the meeting either in person, by proxy, or by voting letter. For the Proposal to pass, at least two thirds (66.67%) of each class of Affected Creditors by dollar value and more than fifty percent (50%) of each class of Affected Creditors by number of those who vote, vote in favour of the Proposal.
42. To be eligible to vote, creditors must have filed with the Trustee, Grant Thornton Limited, before the meeting, a Proof of Claim form, properly completed, signed and witnessed as required, accompanied by supporting documentation.
43. Blank proof of claim forms and proxy forms have been previously provided. If you are planning to attend the meeting in person, you are encouraged to submit your voting letter to the Trustee in advance of the Creditor’s Meeting to have your vote registered. Those creditors who do not intend to have a personal representative at the meeting to be held November 19, 2014 should also complete and submit the voting letter which is enclosed, indicating their vote for or against the acceptance of the Proposal.
44. If the Proposal is not accepted by the requisite majority of both classes of Affected Creditors, Ceili’s On 4th automatically will be deemed to have thereupon made an assignment in bankruptcy as of the date of the vote defeating the Proposal.
45. If the Proposal is accepted by the statutory majority of each of the classes of Affected Creditors, the Trustee will then make application to the Court for approval of the Proposal. If the Court
gives such approval, the Proposal, as approved, will be binding on all the creditors with claims pursuant to the provisions of the Bankruptcy and Insolvency Act.
K. RECOMMENDATION
46. The Company’s Proposal provides for cash payment to Ordinary Unsecured Creditors, not including Ceili’s Group companies, of a pro-rata share of the $135,000 Ordinary Unsecured Creditors’ Fund. Based on the known claims, this will amount to approximately 42% of the outstanding principal amounts owed, less the applicable levy.
47. While the Proposal does not provide for any cash payment to Unsecured Noteholder Creditors, it allows Unsecured Noteholder Creditors to maintain their rights to re-payment in 2022. This is slightly more favorable than the treatment previously provided for in the promissory notes issued to these creditors.
48. However, successful completion of the Proposal is highly dependent on the ability of the Company to meet its projected sales and expense targets, which it has struggled with in recent months. If the Company is unable to meet its sales targets within 9% and keep its food/liquor costs below 33% it may be unable to comply with the Proposal Payments. Since the NOI Date the Company has consistently missed its forecasts and has incurred a net loss. In addition, it has borrowed additional funds since the NOI Date. This raises serious concerns about whether the Company can achieve its projected cash balances. Likewise, the Trustee believes the borrowing of funds from C4 to meet post-NOI obligations constitutes a Material Adverse Change and a default of the DIP loan agreement. While PMC has indicated that it does not intend to take any action with respect to the DIP loan at this time, it has indicated that it will reserve its rights to do so. 49. Nevertheless, if the Proposal is not accepted by the creditors the Company will be bankrupt. As
discussed above, in a bankruptcy liquidation scenario, it is highly unlikely that there will be any funds to pay claims of the Unsecured Creditors.
50. While there is some concern whether the Company can meet the Proposal terms, the potential recovery if the Proposal is successful and bankruptcy can be avoided are almost certainly greater than in a bankruptcy scenario. Therefore, the Trustee respectfully recommends that the Ordinary Unsecured Creditors and the Unsecured Noteholder Creditors consider accepting the Proposal.
DATED at Calgary, Alberta, this 9th day of November, 2014. GRANT THORNTON LIMITED
Per:
Charla Smith, CGA, CIRP Senior Manager
